Question

On June 30, 2021, Singleton Computers issued 8% stated rate bonds with a face amount of $200 million. The bonds mature on June 30, 2036 (15 years). The market rate of interest for similar bond issues was 7% (3.5% semiannual rate). Interest is paid semiannually (4.0%) on June 30 and December 31, beginning on December 31, 2021. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. Determine the price of the bonds on June 30, 2021.
2. Calculate the interest expense Singleton reports in 2021 for these bonds using the effective interest method.

	Table values are based on: n = i = Cash Flow Amount Present Value Interest Principal Price of bonds

Period-End	Cash Interest Paid	Bond Interest Expense	Premium Amortization	Carrying Value
06/30/2021
12/31/2021

Answer 1

Requirement 1:

Table values are based on:
n=	30
i=	3.50%
Cash Flow	Amount	Present Value
Interest	$8,000,000	$147,136,400
Principal	$200,000,000	$71,256,000
Price of bonds		$218,392,400

n = No. of interest payments = 15 years x 2 times = 30

i = Semi-annual market rate = 3.5%

Calculations:

Interest payment = Face value of the bond x Interest rate = 200,000,000 x 4% = $8,000,000

Present value of the interest payments	$147,136,400
[$8,000,000 x 18.39205 present value annuity factor (3.5%, 30 years)]
Present value of the face value of the bond	$71,256,000
[$200,000,000 x 0.35628 present value factor (3.5%, 30 years)]
Price of the bonds	$218,392,400

Requirement 2:

Amortization schedule under effective interest method:

Period-End	Cash interest paid	Bond interest Expense	Premium amortization	Carrying value
6/30/2021				$218,392,400
12/31/2021	$8,000,000	$7,643,734	$356,266	$218,036,134

Explanation:

Cash interest paid = $200,000,000 x 4% = $8,000,000

Bond interest expense = Preceding carrying value x 3.50%

Premium amortization = Cash interest paid - Bond interest expense

Carrying value = Preceding carrying value - Premium amortization